Stocks and Dollar Yen at risk of big break lower

October 9, 2013

US politicians have a great ability to put themselves and self interest first and for all the warnings about the impact of the US Government shutdown and the impact on the economy and the even worse impact if there is a default there is no stopping the partisan rhetoric that continues to be sprayed at the moment. Indeed the US Government shutdown has now dragged into its eighth day and even though President Obama urged Republican leader Boehner to “stop the excuses. Let’s vote in the House” the ring is still of partisanship particularly when he said he would negotiate only once the Republicans end the threats.

So it was more red ink on stocks overnight as the S&P 500 broke down through its 1 year uptrend line. This is a huge move for the market technicians who reckon this signals a much deeper sell off.

We’ve been talking about this stock sell of since the technical turned a couple of weeks back but the break of the S&P’s 12 month uptrend overnight was a signal that both it’s fall and the associated weakness in the ASX and SPI 200 contract could be about to accelerate.

As I have noted above and written about recently the partisan nature of the fight in the US at moment means the chances of compromise are less likely than the sanguine attitude that most traders and investors seem to hold about an 11th hour respite. We are of course hopeful of a deal being stiched up but for the moment the outlook is clouded – at best.

Which leads us with technicals as the best road map.

Clearly the S&P 500 has broken lower and a reasonable target is now 1625 and then the 1598 level which is the 200 day moving average and below this 1580 which is the 38.2% retracement level of the big 12 month uptrend.

The important thing here is that a move back into the 1580/1600 zone is just an average garden variety retracement and in keeping with normal permutations – but a sell off like this is going to feel very ugly after a 12 month uptrend so could accelerate.

Anyway at the close the Dow was down 159 points for a loss of 1.07%, the Nasdaq was down 2% and the S&P 500 fell a full 21 points for a loss of 1.26%. Continental Europe seems still somewhat sanguine about the troubles in US stock markets with the DAX off just 0.41%, Milan down 0.27% and Madrid off 0.67%. In Paris trhe CAC fell 0.76% but it was only the FTSE in London that fell more than 1% closing down 1.11%but crucially on its lows. More losses beckon this afternoon when Europ opens.

Closer to home the SPI200 looks terrible technically and on the Sydney Futures Exchange the December contract fell 37 points.

The last two days trade on the SPI 200 has been ugly, just plain ugly. The target is now the 38.2% level of the most recent uptrend which comes in at 5030 as you can see in the chart below.

We are keeping an eye on rates markets as a bellwether for the risk off trade as well and while longer bonds in the US, UK and Germany were fairly static what was interesting – at least as a guide to risk appetite – is the move higher of 5 and 8 basis points on Italian and Spanish 10 year bonds respectively. Shorter term though the risk aversion had an impact on the US Treasuries sale of $30 billion of 4 week bills went at a price of 0.35% which is being touted as “the highest rate in 5 years”. But frankly, big deal – if default was really a threat no price would suffice. When these things are above 4 or 5% then we’ll know the market is really worried.

On Forex markets, like bonds, trade ended fairly quiet day on day but this masked the attack which pushed the US dollar lower before it recovered. The Aussie rallied to a high of 0.9484 but is back at 0.9434 as I write for a tiny gain on the day. Likewise the Euro rallied to 1.3607 but is back at 1.3575, GBP (1.6086) hit a high of 1.6124 and USDJPY (96.95) hit a low (Yen strength) of 96.55 where the buyers were apparently lined up. At least this time.

Looking at the USDJPY technicals we can see that it turned down back in July with the break of the big uptrend and then went about retesting that trend from below but failing to break it. So for the past few weeks the Yen has been gradually strengthening until, as we saw last night, it touched and found support at the 200 day moving average at 96.75.

Key here is that USDJPY is currently below but a clear break will result if and when the price falls below the August low at 95.75. If that happens its a big fall for USDJPY.

On Commodity markets the weaker US dollar saw oil up 0.49% to $103.53, gold was unchanged at $1321 and Copper was down a tick to $3.28 lb. Corn was at it again off 1.84%, Wheat fell 0.32% and Soybeans fell 0.66%

On the data front today we get Westpac Consumer Confidence at 11.30 in Australia, BoJ monetary policy decision is also out and tonight we get Industrial Production data for the UK and Germany.

There is also a 10 year note auction in the US and the Fed’s minutes to its recent meeting both of which will be worth watching.

Have a great day and good hunting

Greg

Social

Free Daily Market Update

Live Spreads

SymbolBidAskSpread

Spread

Sign up to the latest forex news and daily FX trading setups

Get started with a FREE $50,000 demo account